Wednesday, July 22, 2009

"Starve the beast" certainly does work! (Alas, "Gorge the Beast" does too.) 

Looking at recent fiscal history, Megan McArdle opines...

For a long time, Republicans, and conservatives, and libertarians, embraced a strategy known as "starve the beast". The idea was that you pass tax cuts now, and the resulting budget deficits will hold down spending increases. Eventually, it will get so bad that they'll have to cut spending, because tax increases will be so unpopular.

Hrm. Didn't work out as planned.
But she errs, as do many others who reach this conclusion after looking at all the spending on earmarks and "bridges to nowhere" of the Bush years.

Look again. Adjust your perspective from tiny expenditures like earmarks and bridges to the big picture that really matters.

If "starve the beast" doesn't work and isn't working now, why does Krugman moan and lament that Bush and his tax cuts have set the revenue baseline so low that that Obama and the Democrats can't raise revenue for the spending he wants -- especially for nationalized health care?
the tax cuts enacted by the Bush administration are, in effect, a fiscal poison pill aimed at future administrations ...

... it’s remarkable and disheartening to see how effective President Bush’s fiscal poison pill has been in restricting the terms of debate.
Beyond that, the Reagan deficits resulted in real paygo spending rules that significantly restricted new government spending programs for most of a decade until the surplus came in.

Even on Brad DeLong's blog, if you go back, way back, to the days when he entertained differing point of views (there was such a a time!) you'll find former Congressional Budget Office head Rudy Penner saying that those paygo spending restrictions collapsed and government spending surged when the surplus suddenly, unexpectedly came in -- so deficits no longer restrained spending.
DeLong:... the rapid dissolution of the effectiveness of the [paygo spending discipline] process after 1997 puzzles me greatly...

Penner: I believe it was the surplus...
Going forward, since the historical record clearly shows that Congress closes big fiscal gaps with compromise solutions, spending cuts to go along with tax increases -- the 1983 Social Security "bailout" was near exactly 50% tax increases and 50% spending cuts -- we can expect that dropping taxes by 2 points of GDP currently will in the long run cut spending by around one point of GDP in the future compromise that comes out to save Medicare and the rest of the government's finances a decade from now.

The only way to believe "starve the beast" hasn't worked is by being distracted by tiny expenditures like earmarks and bridges to nowhere. Look at "points of GDP" level expenditures, and it is very clear it does work.

Milton Friedman urged: Cut taxes at every chance for any reason, it will reduce future spending. That's good!

Paul Krugman laments: All those stupid tax cuts are limiting our spending. That's bad!

When Friedman and Krugman agree on something, pay attention!!

Ms. McArdle then goes on...
It seems to me that many Democrats want to do the same thing in reverse. Pass programs now, and figure out how to control costs later.
She's noticed! Except she gives too much credit -- often there is no even pretend intention to cut costs later. The goal is just to get people hooked on programs they wouldn't vote for if the cost was presented to them up-front, and then force them later to pay for the programs by the hard necessity of paying for run-up debt.

This is in fact an explicit strategy peddled on the left that we might call "Gorge the Beast with Meals Put on the National Credit Card then Wait for the Bill to Come", but which they describe more aesthetically as "Feed the Beauty" ...
The tacit wager of “Feed the Beauty” is that taxes will eventually rise to come in line with higher spending. Why? Because Americans will, over time, come to realize that the government we want is actually worth paying for...
Even though this stategy admits American's don't want that government at its real cost, which is why it has to be provided "free" -- until huge debt piles up, at which point they will be forced to incur big increases in taxes to pay for it all, or see the country auctioned off to the Chinese...
...(as opposed to having our children borrow money from the Chinese to pay for it, the de facto “plan.”) The paradox of this revolution in governing philosophy is that its success relies on the same underlying political dynamic [as "starve the beast"].
Except it is far, far more committing and dangerous.

If deficits created by tax cuts are too large, then the cuts can always can be reversed later. Simple.

But if deficits and massive debt are run up by bad, wasteful, porked-up spending until it gets a hold of the national credit rating, there are no tax cuts to reverse, just masses of constituents tied into that spending, relying upon it and politically defending it. What can you do then?

Of course, this is hardly a new strategy for Democrats. Say: "Medicare, and huge tax increases or national bankruptcy circa 2030".

So as to all those current Democratic promises to the effect that, while their national health care reform will cost a trillion dollars over the next ten years up-front, they will find ways for it to produce big savings later... buyer beware!